A world of worry for the stock market

So much for the “economy will improve in 2014 (really!)” stories. The stock market is struggling to avoid another big sell-off today. But bargain hunters are facing the downdraft of jitters over emerging markets. As their stock markets crash and fear gathers about Chinese manufacturing and debt, it will be more difficult to continue the party on Wall Street. The world is too interconnected.

The Federal Reserve did many things with its low interest rates, expansion of the monetary base and quantitative easing. All this arguably saved the economy from inflation. But it also sent hundreds of billions of dollars offshore in search of higher yields, including in the “carry trade,” where an investor uses dollars to buy a currency yielding a higher interest rate. It sure beats working for a living — or using the money to start businesses, hire people or give raises back in the U.S. of A.

That’s coming to a close as the Fed backs off its bond-buying program (tapering) and higher interest rates are drawing investment out of developing nations and back to the United States. Everybody knew it was going to be ugly. How destabilizing the change turns out? We’re now finding out.

But remember Tolstoy Economics: Each unhappy economy is unhappy in its own way. So Thailand, Southeast Asia’s second-largest economy, is facing violent anti-government protests and allegations of widespread corruption. Turkey, once seen as a bastion of democracy in the Middle East, is in political trouble. South Africa is seeing widespread labor trouble, including new strikes at its biggest platinum mines. Brazil’s growth is slowing everywhere but in inflation.

In each case, the domestic currency is falling as outflows go to developed nations, especially the United States, exacerbating the local troubles.

At best, this will mean a time of rocky adjustment (Brazil’s top central banker is calling for higher rates to stem the outflows). But with American stock markets at dizzying heights, many investors may be choosing to move to the sidelines.